India’s shrinking middle-class debate, why is it ruffling feathers?
The?slowdown?in?consumer?demand?reported by?a?number?of consumer?goods?companies?has been dubbed the?“shrinkage of?India’s?middle?class” by Nestlé management (https://shorturl.at/FgIah).
The term?is reminiscent of?Thomas?Piketty’s essay?on India’s?disappearing middle class?(2018) and the estimates contained in his co-authored paper “Economic inequality in India: the “Billionaire Raj” is now more unequal than the British colonial Raj”, 2024.
That many companies?are in line?with an economist?who called out the end?to the era?of?global neoliberalism and a beginning of autocratic nationalism is?a puzzling?contrast. It can be seen as a corroboration of Piketty's thesis that was summarily rejected by Indian policy makers and commentators.
Political connotations aside,?most consumer?goods?companies?say?that actual?consumer demand growth of?3-4% is dangerously low for India’s strong growth?narrative and long-term sustainability; it deserves a policy redressal we have been advocating for a while.
Large companies are?struggling?with volume growth of 0-3%,?Nestlé reported?a 1% YoY?decline?in the?September?2024 quarter, significantly lower than?the?6-7%?in?2016-2022 and 4% in March 2024 quarter. HUL's volume growth at 0-3% compares against 8-10% around 2012.
And?this?contradicts?India’s?GDP data?for the first quarter of FY25, which estimated resurgent private consumption growth of 7.2%, from?a?mediocre?4% in FY24.
While?consumer goods companies’?concerns are?well-founded?and a capitulation to the fact?that real?household income has?fallen along with?the decline in?savings, it is not entirely fair for them to complain about falling demand; they?are still sitting at multidecade high operating profit?margins.
Over the?last five?years, companies have?paid scant attention to?volume growth and value segments. From?automakers?to durable goods?companies?to?essential goods?companies,?companies have reaped abnormally high?profits?on?the?back of premiumisation triggered by?exorbitant price?increases.
An example is coffee, a product Nestle has been a pioneer since 1963. The long-term coffee consumption in India has grown at a meager 1% (24-year CAGR), i.e. less than the population growth. But the average price rise has been 9%, ie of every rise in household spending on coffee, 90% is contributed by higher prices. The growth in this segment is thus all about productization, which companies including Nestle, and more recently Tata Consumers through its Starbucks JV have gained from.
Generally, companies have been able to?do so because the?acute K-shaped?post-pandemic recovery?is characterised?by a?thin?upper arm and a thick lower arm; a feature officials have denied.
The urban?recovery has been strong and?aided by exuberant?leveraged spending,?even as broader households spanning?rural?and?unorganised?sectors?have?suffered.
Corporates?are now?worried as?urban demand is also?slowing?even as rural?demand has?not seen any significant comeback. Their ability to sustain peak margins is?being strained?as it has?led to?downtrading,?creating?space for local brands.
Taxes?on households are also at peak levels, corporate spending on compensation is slowing and?the?RBI is tightening?the?screws?on?exuberant retail lending.
So, what will likely ensue is an adjustment phase when companies will have to forego peak margins to defend their market share, which they will.
Thankfully for them, it is unlike the 2000-2004 slowdown phase when staple companies were fighting each other.
Following a phase of stress, they will look for profit expansion once again as commodity prices normalize even with sub-par volume growth. It will indeed be hasty to assume that their market power will erode for a long time.
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Vice President- FX Product specialist- North , South & west - Institutional banking Group - CITI BANK NA EX - SCB
4 周Insightful - we have to wait and see the impact on the gdp if private consumption stays tepid - my guess is that gov Capex will pick up pace & would lead to meaningful uptick in growth - the gov is behind the budgeted numbers for capex & will have to backload most of the borrowings - the rural demand will pick up albeit at a glacial pace with mansoon panning out better than expected, the Rabi and kharif output is good , rains were bountiful and high crop output would lead to elevated farm incomes spurring consumption , states doling out subsides and giveaways would also lift demand at the margins -
Vice President - Cyber, Data Protection
4 周Excellent article Dhananjay Sinha The reasons need to be understood for speedy course correction by (a) Government and (b) Industry / captains of Industry. The elephants in the room or holy cows, that nobody wants to talk about are (a) Oligopolies and (b) Asset inflation, which in combination have hollowed out the middle-class. The IT slowdown and AI will further exacerbate. India needs a Government-Business (chaebo, zaibatsu) proximity, nurturing and hence we should raise about politicizing certain conglomerates. But oligopolies in several sectors (banking, insurance, healthcare, etc) are drowing the India growth story. The profound quote from Saving Capitalism from Capitalists (2004) "Capitalism's biggest problem is the executive in pinstripes who extols the virtues of competitive markets with every breath while attempting to extinguish them with every action", is a grim reminder. USA could maintain competitiveness by timely, proactive anti-trust moves. Also, India businesses need to respect the Consumer Protection Act, in its true spirit and not wait for celebrities to pick up the cudgel on behalf of aggrive consumers, like in Ola escooters matter.
Global strategy and operations ( Southeast Asia, Middle East and Russia )
1 个月Dhananjay Sinha is insightful.. the economy is facing significant challenges, yet there appears to be a reluctance to acknowledge this reality.
Passionate about Digital Transformation, People first, IT Next
1 个月Good one Dhananjay Sinha. I always wonder if the current players in the FMCG space are missing the large market at the bottom of the pyramid. We all celebrate the launch of small packets as 'innovation'. But is there scope to do much more than that to tackle the lower half of the 'K'?
Economist | Strategy | Ex KPMG, RIL | ISI
1 个月Very informative sir.